Ancestry.com Goes Out on a Family Tree Limb

Shares of the leading genealogy website operator were down by roughly 20% this morning after the company posted financial results that inherited trouble spots in key metrics and ended with a soft outlook for the current quarter.

The fourth quarter itself wasn't too shabby on the income statement. Revenue climbed 26% to $104.2 million, fueled by a 22% increase in subscribers and a healthy year-over-year increase in average revenue per user. Ancestry.com's profit of $0.40 a share was ahead of both the $0.25 a share it earned a year ago and the $0.34 a share that analysts were expecting.

So far, so good -- but now let's introduce the rest of the brood.

The black sheep of the familySubscriber acquisition costs clocked in at a problematic $107.88 for every gross subscriber added to its rolls. That ransom was just $93.64 three months earlier and $96.87 a year before.

Paying more for new customers would be worthwhile if they were paying more, but -- alas -- they're not.

Average monthly revenue per subscriber may have climbed to $18.38 from $17.78 a year earlier, but it was a dip for the third quarter's $18.68 showing.

There's a reason for that. The premium website operator tweaked its pricing late last summer. Ancestry.com decided to bump its monthly rates higher, but at the same time providing better discounts on longer-term subscriptions. In other words, it's trying to make it more cost-effective for new visitors to sign up for longer membership plans.

This should improve churn, and it did. Ancestry.com's monthly churn of 3.8% is refreshingly lower than the prior year's 3.9% and the two preceding quarters at 4.6% and 4.2%.

This is the silver lining behind the lower revenue average per subscriber, but they better stick around longer given the growing marketing costs to woo them over in the first place.

As the world churnsSubscriber turnover can be a tricky beast. Netflix (Nasdaq: NFLX) recently discontinued its practice of publicly disclosing its churn rate -- which last year was roughly in line with Ancestry.com's rate. Netflix argues that churn is no longer a useful metric in assessing its business, though cynics will argue that Netflix is abandoning the gauge because churn on its growing streaming business should be much higher than on its fading DVD-based business.

Other popular subscription services including TiVo (Nasdaq: TIVO) and Sirius XM Radio (Nasdaq: SIRI) are sporting substantially lower churn rates than Ancestry.com, but it's not fair to compare the services. TiVo and Sirius XM require costly upfront hardware investments that make it easier to justify longer tenures. Ancestry.com is a strictly a Web and mobile app platform. Renewals are based more on the user's appetite to dig deeper into his or her lineage than fretting over a $300 DVR or $200 satellite radio receiver.

Who Do You Think You Are? -- the primetime genealogy series that Ancestry.com and Comcast's (Nasdaq: CMCSK) NBC Universal put out -- began airing its third season earlier this month. This is great publicity for Ancestry.com. If viewers get excited about watching Martin Sheen and Marisa Tomei dive into their roots on Friday nights with the help of Ancestry.com, where do you think they will turn when it's time to learn more about their own ancestors?

The market's still skeptical. Ancestry.com is eyeing just $106 million to $108 million in revenue this quarter, representing a meager sequential uptick over the holiday quarter's $104.2 million but also shy of the $108.9 million that Wall Street was targeting.

Ancestry.com's guidance for all of 2012 -- calling for revenue to grow by 14% to 18% with adjusted EBITDA climbing even better -- is more in line with what the market's expecting, but investors will always take the near-certainty of a current quarter's projections over the foggy nature of a full-year glimpse.

The market may also not be entirely pleased that Ancestry.com is only looking to close out the year with a little more than 1.9 million subscribers. There may be nothing inherently wrong with growing its rolls by 12% to 15% this year, but the service did add more net new subscribers in 2011.

The good news here is that Ancestry.com has never been this cheap. The stock is now fetching just 15 times this year's projected profitability and a mere 12 times next year's bottom-line target. The family portrait may not look pretty now, but the price is certainly right for a service that is continuing to grow in popularity.

Next in lineAncestry.com has been a disappointment since I recommended it to Rule Breakers newsletter subscribers two years ago, but a few big winners have been more than enough to generate overall market-thumping returns for the growth stock service. Now it's time to discover the next Rule-Breaking multibagger. It's a free report. Want it? Get it.

Longtime Fool contributorRick Munarrizcalls them as he sees them. He does not own shares in any of the stocks in this story, except for Netflix. Rick is also part of theRule Breakersnewsletter research team, seeking out tomorrow's ultimate growth stocks a day early.

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As an ACOM shareholder, I obviously don't like the 20% drop. But, I guess that's par for the course when you invest in Rule Breakers. I own several other Rule Breakers and they have done well. ACOM is the notable exception...

I would be worried if the earnings were trending sideways or down. That just means the stock got a lot cheaper.